Is the Gold Rally Over?

Brexit Fears Fade

After sending tremors across financial markets for a week due to the rising possibility of a Brexit, polls have turned in favor of remaining in the EU. As a result, risky assets have become more favorable again, whilst safe- haven assets such as Gold lose its luster.

On June 16 and 17, Gold traded above $1300 following a dovish Fed announcement, but has since come back down to trade around $1285. This raises the question of whether the Gold rally is nearing its end.

Could the Fed turn more bullish?

Two of the main issues noted by Fed Chair Janet Yellen on June 15 were the weak May jobs report and Brexit uncertainty. However, the Chairwoman did stress that it is important not to overreact to one bad jobs report, and also highlighted the improving wage growth conditions.

If current polls turn out to be right and the UK decided to vote against Brexit on June 23, one cloud of uncertainty would vanish for good, which could pressure Gold prices downwards, as safe- haven bets unwind.

In fact, it would potentially allow the Fed to adjust its tone to a more hawkish tune. Consequently, a strengthening USD could also drag down the Dollar- denominated precious metal.

Related Link: This Economist Is Bullish On Gold, But Says Be Wary Of Near-Term Pullback

Are there other uncertainties?

Whilst Brexit is one uncertainty, China still remains a threat to the global economy and financial markets. Several major institutions, including Goldman Sachs, have raised questions regarding the sustainability of China’s national and corporate debt levels.

Making matters worse, the actual size of China’s shadow lending problem remains a question mark. A build up in credit risk in this opaque market could potentially materialize into a black swan event, in which case safe- haven assets would strive again.

Recent renewed concerns of another possible Yuan devaluation could also rattle markets. Moreover, it would make it more difficult for the Fed to carry on hiking interest rates, in order to avoid an overly stronger USD against its rival currencies, including the Yuan. This would provide some support for Gold prices.

Therefore, whilst sentiment may be changing against Gold, the precious metal should certainly not be ignored. Sooner or later, when worldwide loose monetary policy finally raises inflation levels, Gold will certainly be one of the top inflation- hedging assets. In fact, Gold had been falling for four consecutive years since 2011, hence in the bigger picture, a long- term bullish bet is deemed wiser than a long- term bearish bet at this point.